Effective Financial Management- Setting a Developmental Agenda

In most instances, enhancing financial management capabilities will require that leaders not just focus on that which can be made more effective and efficient- that is obvious and easy and does not create a lot of value.  Instead, Finance leaders will have to both focus on efficiency and at the same time focus on what has been missing and create those capabilities from the “ground up”.

I recently attended a local CFO Breakfast.  The breakfast theme was financial leadership-and it lead to a lot of different interpretations in the discussion- but some common themes emerged and not all of them are new.

  • Role of finance
  • How can finance “get more respect” be more vital etc?
  • What should finance be working on….

The answers are of course:  It depends on the individual circumstance.  I go to the school that all improvements are good improvements- and that the value of investing in upgrading capabilities will eventually accrue to the organization.  However, absent a specific change agenda, I suggest that Finance Leaders consider the following scenario and plan their mid to long term development agenda around the needs suggested in the scenario below:

  • Investors will always demand incremental returns….
  • There  is significant cash on the sidelines of public companies and investment funds
  • So …Companies will have to invest or return cash to shareholders or limited partners- which for a whole host of reasons, there is a general reluctance to do so…
  • Hence …there is pent up demand to invest- and in the Spring of 2011 this is playing out in the volume of announced large strategic deals
  • Meanwhile,,,, Banks are offering less leverage than once considered “normal”
  • And…. Lack of leverage staunches the ability to increase returns using financial engineering techniques
  • At the same time it appears that…. developed economy countries economies will not grow very rapidly in the near term and therefore not provide volume growth opportunities to the market
  • Hence….“Class of 2011 and likely 2012” deals will have to get their returns the old fashioned way- they will have to earn them through
    • Market Innovation- new products and new markets
    • Operating excellence- achieve best cost operations
    • Working capital creation and increased velocity
    • Causing…. the overall competitive environment to intensify as mergers and acquisitions that are sure to follow an economic downturn take place but in new formats and capital structures
    • And….place pressure on all competitors for enhanced performance
    • Which… if not properly managed could start the economic challenges giving rise to this scenario to start all over again…. Just when we thought we were emerging….

To deal effectively in this environment, companies and their finance leaders will both have to ensure that the skills and capabilities in the finance group are sharp as well as ensure that the organization as a whole understands and is focused on driving returns for the business.

If these assumptions are plausible for your organization, it stands to reason that companies will need to have above average capabilities in most all of the five following domains.  In fact the capabilities will have to be so good that they will both enable profitable innovation and growth- as well as pave the way for solid operating performance- and today, not many companies are necessarily good at both.

Domain Relative Financial Management ability required in the business
Financial Planning, Control and accountability Businesses will have to plan with more rigor to ensure that scarce resources are allocated in ways that will drive value and produce measurable results in the expected timeframes; Accountability processes will have to be real time and responsive to changing market conditions and company performance.
Information for Decision Making Business leaders will need to have relevant, reliable and readily available information where and when they need it- in the formats that promote insight and compel action.
Cost Structure Understanding Companies will not have just have to have low cost- they will require a best cost approach to the business- that is integrated- investing, cost cutting and operating rigor can’t operate independently. For success, they will have to operate together.  Capabilities will have to be in place so that people designing operations are doing so with the cost structure in mind so that they can make appropriate optimizing trade-offs and decisions.
Business Literacy People planning and commanding resources will have to have a firm sense of the business of the business of how profits are earned and value is created so that they can make real time tradeoffs and decisions.
Working Capital Capital deployment will be key.  Idle assets will have to be turned into cash and invested or used to meet the capital requirements of the business.    Similarly, returns on new capital invested will have to be closely monitored to ensure sustainable value creation.

Time is tight and the stakes are high. Financial leaders will have to take stock to ensure that not only do individuals in the business possess capability and capacity in these domains, but that the fundamental business practices and processes are in place to effectively use and deploy these capabilities.  Some organizations will have to do some quick make or buy analyses to determine their organization’s own capabilities and the most expeditious path to developing and deploying them.

  • How do you rate your organization’s abilities in these domains in light of your business requirements?
  • What can you do to ensure your finance organization is up to the task?
  • What’s in the way of you accomplishing what you need to accomplish?
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